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Debt Restructuring Apr17
Debt Restructuring Apr17
Since states are not protected by bankruptcy or insolvency that option out of fear of rating downgrades by credit
laws in national or international law, when a country’s rating agencies and loss of market access.
sovereign debt becomes unsustainable and it can no longer
repay its public debts it cannot simply declare bankruptcy Once default happens, the government needs to start a
as a private entity would do. Before reaching that moment of restructuring process, meaning renegotiating the contract
debt distress,1 the country’s government has very few options terms of its debt with its creditors. According to the
to avoid default: keep borrowing – making the problem International Monetary Fund (IMF),3 between 1950 and 2010
even bigger, – raising taxes and mobilising other domestic there have been more than 600 cases of debt restructurings
resources to have more revenue to keep paying, or cutting in 95 countries. These numbers show that it is often the case
public spending to free up resources to pay back its creditors. that a country that recurred to debt restructuring is likely
This last option comes at the expense of impacts on to do it again, with repeat defaulters representing up to 61
human rights, particularly women’s rights2. All these per cent, exposing the inefficiency of the current system. On
alternatives generally end up delaying default, but not average, African debtor countries had to negotiate with the
avoiding it. The country could also try a pre-emptive debt Paris Club seven times,4 with no debt sustainability achieved
restructuring (to avoid default), but most countries avoid after just one negotiation.
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The debt games • April 2023
Debt restructurings tend to be opaque processes with no and even religious dimensions influences what, in theory,
commonly set rules nor universally-accepted consensus should be a legal process driven by economic and financial
on how they should work or unfold. A combination of rationale,5 taking into account the impact on the wellbeing
political and strategic interests, normative considerations of the country’s citizens.
WHEN? HOW?
The majority of restructurings happen after a Sovereign debt restructuring actions generally fall into
country defaults, meaning that it cannot service two categories (or a combination of them):
its debt payment on due time. There’s also the debt rescheduling, where there is a debt reduction – also known as debt
possibility of pre-emptive restructurings, which change in the terms and conditions of haircut or debt cancellation – where there
happen prior to a default. The two things are not repayment, such as a lengthening the is a cut in the face (nominal) value of the
mutually binding, meaning that there can be a repayment period, offering a grace period existing debt stocks.
default without restructuring and vice versa. or lowering interest rates and fees
Multilateral creditors are normally excluded from debt Even if not involved in the restructuring of a country’s
restructuring. They argue that debt relief would jeopardise the debts, these two institutions still play very central roles
credit-worthiness of the institution and they would rather continue producing the Debt Sustainability Analysis (DSA); financing
financing countries in debt distress, usually via additional loans, the country even if it is in default (“lending into arrears”);
than cancel the debt 9. Nonetheless, in 2005 the IMF and the World or playing an informal mediation and influencing role in
Bank (WB) participated in the Multilateral Debt Relief Initiative the negotiations. They are also observers to the Paris
(MDRI)10, proving it is possible for multilateral lenders to cancel debt Club negotiations and can participate in the Common
without impacting their credit-worthiness. Framework Creditor Committees.
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After months or years of negotiations (the nine restructuring Is an alternative to the maze possible?
cases between 2014 and 2020 took an average of 1.2 years,
with many cases going over two years of negotiations), The debt restructuring process is chaotic, costly, long, and
Debtlandia will likely achieve an agreement with its bilateral difficult to understand, particularly for ordinary citizens that
and private creditors, that will most probably be “too little, suffer the consequences. Additionally, success is determined
too late”.18 Its debts to multilateral development banks by the calibre of lawyers a country can afford to hire, as
(MDBs) and the IMF will remain untouched. As in most well as the willingness of a government to refuse to pay
cases, Debtlandia will probably have to go through further if creditors do not agree to an acceptable deal. Powerful
rounds of debt treatment in the coming years, until creditors creditor countries maintain the current lack of a system
realise there is need for a substantial debt reduction for because it enhances their power, and that of their private
the country to achieve debt sustainability. Historically, debt companies, in debt negotiations. Furthermore, debtors today
default episodes have taken an average of seven years to be have to navigate new instruments, creditors, innovations and
resolved, involving multiple restructurings.19 The IMF itself interests, which greatly complicate the restructuring process.
agrees that20 “debt restructurings have often been too little As the World Bank President David Malpass described it back
and too late, thus failing to re-establish debt sustainability in 2020, it is “the modern equivalent of debtor’s prison.”26
and market access in a durable way.”
In opposition to this chaos, the offspring of an almost
80-year-old agreement, we propose a systemic reform
Box 5: Suriname, holding its breath of existing debt architecture. It is time to update the debt
and oil for 3 years… and counting resolution frameworks to adapt to the new world we live
in and, most importantly, to the needs of global south
One striking case of what to expect from a debt countries and their people. We need a permanent rules-
restructuring process is Suriname. This Caribbean based multilateral debt resolution framework that provides
country21 began a process to restructure its debts with fair, timely and comprehensive debt treatment from all
official bilateral and private creditors in November lenders and for all countries according to their needs. We
2020, when it became the second country after Zambia need a mechanism that does not rely on creditors’ will, nor
to default on its sovereign debt in the aftermath of is defined solely by creditors. We propose a debt workout
the Covid-19 pandemic. Twenty months later, in July mechanism hosted under the auspices of the United
2022, the country finally reached an agreement to Nations, since the UN is currently the only forum in which
reschedule debt payments with its bilateral creditors all countries have equal say and is neither a creditor nor a
at the Paris Club.22 India agreed on a small debt borrowing institution. This Debt Workout Mechanism should
restructuring in January 2023.23 However, China has respond to 10 essential principles.27
yet to reach a deal, and Suriname’s private creditors,
mostly bondholders represented through investment
funds, have also refused to close a deal (thus breaking
comparability of treatment). They argue that the
country could have bigger revenues in the future
to repay its debts if its offshore oil reserves were
exploited.24 The implementation of the country’s IMF
programme, – which includes conditions to remove
fuel and electricity subsidies – together with the
rising prices due to global inflation and aggravated
by the lack of resolution to the debt problems, have
led to an increase of social unrest, including massive
demonstrations in February 2023.25 Meanwhile,
Suriname still works on its debt restructuring.
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The debt games • April 2023
1 2
It should be a body independent
restructuring process in pre-
from creditors and debtors to
default phase and an automatic
assure impartiality.
standstill will apply to all
external debt payments.
3 4
The initiation of the process
stock should be dealt with in
should trigger a stay on litigation
a single process, reducing
by uncooperative creditors.
fragmentation and time.
5 6
Inclusive participation sustainability and validation of
of all stakeholders, individual claims to assess the
including civil society. legality and legitimacy of debts
through public debt audit.
9 10
Enforceability, meaning that all
sovereign debt restructuring
parties must respect the decision
negotiations must be established,
of the independent body.
and the negotiations and their
outcomes must be made public.
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The debt games • April 2023
Endnotes
Acknowledgements
1 The IMF defines debt distress as when “a country is unable to fulfil its financial
obligations and debt restructuring is required”. When the state misses a payment This report was written by Iolanda Fresnillo and
on some or all of those falling due, it goes into default.”
2 ‘Submission to the Independent Expert on Foreign Debt and Human Rights on the Ilaria Crotti (Eurodad), with country-cases contributed
Links and the Impact of Economic Reforms and Austerity Measures on Women’s by Muchimba Siamanchoka (JCTR) and Pablo Iturralde
Human Rights’ (Gender Development Network, March 2018), https://www.ohchr.
org/sites/default/files/Documents/Issues/Development/IEDebt/WomenAusterity/ (CDES). Special thanks to Tim Jones (Debt Justice UK)
GenderDevelopmentNetwork.pdf. and to Jean Letitia Saldanha at Eurodad for their reviews
3 Das Udaibir S, Papaioannou Michael G, and Trebesch Christoph, ‘Sovereign Debt Re-
structurings 1950–2010: Literature Survey, Data, and Stylized Facts’, 2012, https:// and invaluable input for the development of this briefing.
www.imf.org/external/pubs/ft/wp/2012/wp12203.pdf.
4 Ibidem. Copy editing: Mary Stokes
5 Mark Perera, ‘We Can Work It out: 10 Civil Society Principles for Sovereign Debt
Resolution’, September 2019, https://www.eurodad.org/debtworkout.
6 Das Udaibir S, Papaioannou Michael G, and Trebesch Christoph, ‘Sovereign Debt Contact
Restructurings 1950–2010: Literature Survey, Data, and Stylized Facts’.
7 ‘The Paris Club’, Club de Paris, n.d., https://clubdeparis.org/.https://clubdeparis.org/
8 Daniel Munevar, ‘Sleep Now in the Fire: Sovereign Bonds and the Covid-19 Debt Eurodad
Crisis’ (Eurodad, May 2021), https://www.eurodad.org/sovereign_bonds_covid19.
9 Scott Morris and Iolanda Fresnillo, ‘COVID-19 Response: Is the World Bank Right
Rue d’Edimbourg 18-26
about Not Suspending Debt Service Payments of Developing Countries? A Pro & 1050 Brussels Belgium
Contra’, 16 September 2020, https://www.globaleverantwortung.at/kommentar-
der-anderen-covid-19-response-world-bank-pro-and-contra/.
+32 (0) 2 894 4640
10 ‘Multilateral Debt Relief Initiative – Questions and Answers’, Multilateral Debt Relief assistant@eurodad.org
Initiative – Questions and Answers, 28 July 2017, https://www.imf.org/external/np/
exr/mdri/eng/index.htm.
www.eurodad.org
11 Perera, ‘We Can Work It out: 10 Civil Society Principles for Sovereign Debt Resolution’.
12 Afrodad - African Forum and Network on Debt and Development, Jesuit Center for
Theological Reflection (JCTR), ‘Zambia, Debt and Covid-19’, 25 September 2020,
https://www.eurodad.org/zambia_debt_and_covid_19. All opinions are Eurodad’s alone, and all errors and omissions
13 Lee Buchheit et al., ‘How to Restructure Sovereign Debt: Lessons from Four Dec-
ades’, Working Paper, n.d., https://www.piie.com/sites/default/files/documents/
are the authors’ responsibility.
wp19-8.pdf.
14 CACs are “clauses included in sovereign bonds which bind all bondholders to debt This briefing has been produced with financial assistance
restructuring terms agreed by a super majority of creditors. They are designed to from the European Union and Bread for the World.
prevent holdouts, such as vulture funds, to either block or request better terms
from a country in a debt restructuring process”. https://www.eurodad.org/dam_
debt_suriname
15 Risto Nieminen, ‘Sovereign Debt Restructuring Main Drivers and Mechanism’, Feb-
ruary 2017, https://www.europarl.europa.eu/RegData/etudes/BRIE/2017/593800/
EPRS_BRI(2017)593800_EN.pdf.
16 Guzman, Martin and J. E. Stiglitz. “Creating a Framework for Sovereign
Debt Restructuring that Works.” (2016). https://doi.org/10.7312/colum-
bia/9780231179263.003.0002.
17 Pablo Jose Iturralde, ‘Ecuador, Covid-19 and Debt’, n.d., https://www.eurodad.org/
ecuador_covid19_and_debt.
18 Guzman, Martin, José Antonio Ocampo, and Joseph E. Stiglitz, eds. Too Little, Too
Late: The Quest to Resolve Sovereign Debt Crises. Columbia University Press, 2016.
https://doi.org/10.7312/guzm17926.
19 Alberto Isgut, ‘Addressing Sovereign Debt Challenges in the Era of COVID-19 and
beyond: The Role of the United Nations’, Asia-Pacific Sustainable Development Journal
(United Nations, 2022), https://doi.org/10.18356/26178419-28-2-5.
20 Varapat Chensavasdijai, ‘Sovereign Debt Restructuring - Recent Development And
Implications for the Funds’s Legal and Policy Framework’, 26 April 2013, https://
www.imf.org/external/np/pp/eng/2013/042613.pdf.
21 Daniel Munevar, ‘Dam Debt: Understanding the Dynamics of Suriname’s Debt Crisis’,
20 January 2021, https://www.eurodad.org/dam_debt_suriname
22 ‘The Paris Club provides a debt treatment to the Republic of Suriname’, The Paris
Club provides a debt treatment to the Republic of Suriname, 24 June 2022, https://
clubdeparis.org/en/communications/press-release/the-paris-club-provides-a-
debt-treatment-to-the-republic-of-suriname-24.
23 News CMC, ‘India Agrees to Debt Restructuring with Suriname’, https://www.carib-
beannationalweekly.com/, 12 January 2023, https://www.caribbeannationalweekly.
com/news/caribbean-news/india-agrees-to-debt-restructuring-with-suriname/.
24 Syndey Maki, ‘Suriname Stranded in Default as Bondholders Ogle Oil Royalties’,
Bloomberg News, 26 July 2022, https://www.bnnbloomberg.ca/suriname-strand-
ed-in-default-as-bondholders-ogle-oil-royalties-1.1797209.
25 Catherine Osborn, ‘Suriname’s Unrest Is a Warning’, Foreign Policy (blog), 3 March
2023, https://foreignpolicy.com/2023/03/03/suriname-riots-inflation-debt-imf-chi-
na-india-pandemic/.
26 David Malpass, ‘Reversing the Inequality Pandemic: Speech by World Bank Group
President David Malpass’, 5 October 2020, https://www.worldbank.org/en/news/
speech/2020/10/05/reversing-the-inequality-pandemic-speech-by-world-bank-gr
oup-president-david-malpass.
27 Perera, ‘We Can Work It out: 10 Civil Society Principles for Sovereign Debt Resolution’.